DP1468 Promoting an Effective Market Economy in a Changing World

Author(s): Willem H. Buiter, Ricardo Lago, Nicholas Stern
Publication Date: October 1996
Keyword(s): Macroeconomic Stabilization, Market Institutions, Political Economy, Transition Economics
JEL(s): E61, E63, F31, F33, H11, H20, H40
Programme Areas: International Macroeconomics, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1468

In this paper we examine the main challenges in promoting an effective market economy. While the paper ranges widely across the spectrum of economic institutions and policies, the central theme is the importance of macroeconomic stability for economic growth in the medium and long run. Macroeconomic stability may be seen as a public good. Its provision is among the essential responsibilities of the state both in modern market economies and in economies transforming themselves into modern market economies. Following this brief introduction, Section II considers four key aspects of the economic environment of the coming decades: increasing internationalization; market-orientation; diminished government role; and high real interest rates. Section III reviews the reasons why macroeconomic stability matters for economic performance and summarizes the key empirical evidence supporting the existence of a causal link. Section IV deals with the design of domestic and international policies and institutions to promote macroeconomic stability and Section V asks how national governments and international institutions can take advantage of the current relatively stable global macroeconomic environment to improve medium-term economic performance and promote long-term growth. Section VI concludes. While our discussion will range broadly, both theoretically and empirically, we shall emphasize lessons for, and experience from, countries attempting to create a market economy.